Eurozone Debt Drama Continues

By Inya Ivkovic, MA Published : November 17, 2010

Time to fess up to things again in eurozone, as Ireland finally admits that it is talking with its fellow eurozone members. Although, allegedly, Ireland and the others are not talking about Ireland’s potential need for a bailout, because Ireland insists it does not need a bailout. Which begs the question, what is Ireland talking to the European Union (EU) about? The weather?

Of course Ireland needs a bailout and of course it is talking to its EU buddies about how to go about getting it. It is all in plain sight, too, in British newspapers, where embarrassing headlines are splattered all over, sporting British taxpayers potentially on the hook for about $9.7 billion of Ireland’s debt. Now, this will be a tough sell for the UK government, because it has always claimed that, unlike Greece and other sovereign-debt-heavy eurozone countries, the debt drama was never an issue for the UK. This is true, to an extent, as obviously the UK has not incurred Irish debt per se. However, it has allowed the troubled Irish banks to invest in the UK, which, in the end, amounted to the same thing.

Now, this debt mess is not just an embarrassment for both the Irish and Brits. If it ends up with the UK having to bail out Ireland, ancient animosities are likely to be resurrected, invoking Ireland’s resentment for falling so deeply into the smelly stuff to have to ask Britain for help. And Britain is likely to be infuriated to be dragged into the EU’s financial problems—as if it does not enough of its own!

Still, the British can be angry all they want, but chances are that will not change a thing. Just as Germany was infuriated for having to bail out Greece and had zero choice about it, the UK is in the same boat. The only thing that is likely going to pay the price is eurozone unity.

Ireland has fought long and hard for independence from Britain, both political and fiscal, but it has gambled most of that credit away, particularly the fiscal one. Crying now about “hard-won sovereignty,” as Batt O’Keefe, Ireland’s enterprise minister put it, sounds hollow, considering that most of Ireland’s growth in the past few years has been due to the EU’s loans and subsidies. Additionally, the tax and tariffs that Ireland has introduced recently have stirred up quite a storm on the topic of unfair competition.

Old animosities are a problem, but they are not the biggest problem that the eurozone faces. The real issues revolve around bringing the fiscally irresponsible, debt-laden and slow-growing European economies back on track and back into the fold. However, bringing them back as truly fiscally sovereign nations has come into question. When Greece stood with its hand out before the financially strong and fiscally efficient Germany, it got the money, but it lost its fiscal independence. If Ireland takes the money after the “talking” is done in Brussels, it will likely have to surrender its fiscal independence, too.

If this is something that no one can live with politically, then there might be another solution. Some economists are invoking the dreaded idea of a two-tiered eurozone: one tier for the strong, such as Germany, France, Benelux and Nordic countries; and the other tier for those on the periphery, still tied to the euro, but only loosely and at a significantly lower conversion rate. There might be fewer strings attached, but the severance is not going to be pretty. Even on a purely academic level, the two-tiered eurozone does not seem palatable. Then again, difficult choices usually are not easily digested.